A subprime mortgage is a type of loan issued to people who do not qualify for a conventional loan; this is because the borrower has a less than perfect profile. This would include factors like poor credit history, low income, or a high loan-to-value ratio. Usually a Subprime loan will come at a higher interest rate, understandably seeing as the lender takes on more risk with a subprime borrower opposed to a prime borrower.
Subprime mortgage is available to potential borrowers with poor credit scores. Such people are referred to as subprime borrowers. Borrowers considered risky to lenders can receive financing for a home mortgage through a subprime loan, but the loan generally carries a higher interest rate.
A subprime mortgage is provided for Subprime borrowers in which they typically have characteristics that would suggest a default is more or less likely to occur:
Credit: If you’re a subprime borrower it may be because you have bad credit. You may have had debt problems in the past or may be new to borrowing and have not yet established a strong credit history. As lenders, We generally look for a FICO Score (Credit Score) below 640 to classify one into subprime territory. Unfortunately, if you are a subprime borrowers with bad credit, you will have few options besides subprime lenders when looking for a loan.
Monthly payments: Subprime loans require Larger monthly payments that can eat up a lot of a subprime borrowers monthly income. As lender’s we would use what we call a debt to income ratio to see if the subprime loan is feasible for the borrower. If a Borrower is spending most of their income on loan payments they will have little wiggle room to deal with a loss of income or unexpected expenses. Borrowers that Have a high debt to income ratio can help a new subprime loan get approved
Cost: When dealing with subprime loans you must expect them to be more expensive because lenders are taking on much more risk. These Costs come in multiple forms, including processing and application fees, Higher interest rates, and prepayment penalties which don’t generally apply to borrowers with good credit.
Documentation: If you are a Prime borrower than you can easily provide proof of your ability to repay loans. You will have records showing consistent pay and steady employment. You will also have additional savings in other financial institutions and banks so if they lose their job unexpectedly that they can keep up with payments. If you are a subprime borrower it would be hard to make a strong case for continuing financial stability. You may be financially secure, but you lack the same documentation as a prime borrower. There was a time when lenders would accept applications for low-documentation loans on a consistent basis, some of these documentations contained bad information, which contributed to the mortgage crisis.
Risk: There is a lot of risk involved when dealing with subprime loans. These type of loans are less likely to get repaid, so as lenders we need to charge more money to compensate the high levels of risk. As a Borrower this high interest rate provides a high level of risk for you as well. Make sure when applying for a subprime loan to talk to your mortgage professional to see if it is a feasible option for you.
What is a Sub Prime Borrower?
The term Sub prime borrower comes from the traditional term “prime” borrower in which the Lender’s are eager to work with. Prime borrowers will have low levels of debt, good credit scores and a reliable source of sustainable income ensuring the lender that they will be able to make there monthly payments. A Subprime borrower is some one that has bad credit, a low income or a high loan to value ratio. Subprime borrowers can use these loans for student debt, vehicles, home renovations or medical bills. In the past it was very challenging for a subprime borrower to receive a loan to buy a home. Today it is more accessible to receive financing as a subprime borrower but it does come at a price. The interest rates are higher on a subprime loan than that of a prime loan due to the risk. If you are wondering if you are a subprime borrower look to the following criteria:
- Is your FICO score below 640?
- Have you had a foreclosure in the last 24 months?
- Have you had two or more 30-day delinquencies in the last year?
- Have you had one 60-day delinquency in the past 2 years?
- Have you had a bankruptcy in the last 5 years?
- Do you have trouble paying your month-to-month living expenses?
- Is your debt to income ratio 50% or more?
If you are finding that you fit a lot of the following criteria you are more than likely a subprime borrower. Just because you are considered a subprime borrower and you qualify for the loan does not necessarily mean you need one. As lender’s we will look at each borrower individually when evaluating the above criteria. We will then assess your situation and come up with a solution that fits your needs exactly. You must remember there are no set rules and everyone’s situation is different. If you are looking to avoid higher interest rates, do everything you can to improve your credit score, as this will have the greatest influence. Make sure to make your payments on time and continually pay off your debt. Try to avoid missing payments as best as you can as a good credit history can be the key to a lower interest rate on a loan. Also, try to avoid opening unnecessary accounts as tempting as it may be, even if you maintain a balance on them they can still cause long-term damage to your credit score. If you find yourself needing a subprime loan it is probably because you don’t have any other options, if this is the case than a subprime loan can be extremely useful to get yourself large amounts of money fast.
How to transition for a Subprime Borrower to a Prime Borrower?
If you find yourself fitting into the category of a subprime borrower and wish to become a prime borrower, than you want to address the following criteria:
Manage your credit: It is free to check your credit score through various websites, make sure to check your credit and do what you can to keep it from being poor. Make sure to address any missed payments and stay on top of them because in time, it is possible to rebuild your credit and become a prime borrower.
Look at your income: Lenders Look for a stable and reliable source of income that they can be confident that it will be sustainable in the long run. This means you’ve got a regular income that can cover your minimum monthly payments.
Consider a cosigner: If you find yourself being a subprime borrower and are looking at a way of waiving your risk to a lender, consider a cosigner. A cosigner takes on 100% of the responsibility of the payments for the loan if you fail to pay. A cosigner in turn takes all the risk and is essentially putting their credit on the line. When considering a cosigner seek someone who has strong credit and an income that is sustainable, keep in mind this person is taking on a huge risk so do not take it personally if you cannot find a cosigner.